Join Melissa Joy as she discusses the nitty-gritty of handling extra cash and creating emergency funds. Melissa shares practical tips and personalized advice to help you navigate your financial journey - from stressing the importance of yearly check-ins to offering tailored recommendations to specific situations. Don’t miss out on this enriching episode that offers practical wisdom for effectively managing and investing cash reserves.
Listen and Learn:
Resources:
Links are being provided for information purposes only. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Pearl Planning cannot guarantee that the information herein is accurate, complete, or timely. Pearl Planning makes no warranties with regard to such information or results obtained by its use and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Pearl Planning financial advisors do not render advice on tax matters. You should discuss any tax matters with the appropriate professional.
Join Melissa Joy as she discusses the nitty-gritty of handling extra cash and creating emergency funds. Melissa shares practical tips and personalized advice to help you navigate your financial journey - from stressing the importance of yearly check-ins to offering tailored recommendations to specific situations. Don’t miss out on this enriching episode that offers practical wisdom for effectively managing and investing cash reserves.
Listen and Learn:
Resources:
Links are being provided for information purposes only. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Pearl Planning cannot guarantee that the information herein is accurate, complete, or timely. Pearl Planning makes no warranties with regard to such information or results obtained by its use and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Pearl Planning financial advisors do not render advice on tax matters. You should discuss any tax matters with the appropriate professional.
Welcome to the Women's Money Wisdom Podcast. I'm Melissa Joy, a Certified Financial Planner and founder of Pearl Planning.
Melissa Fradenburg:I'm Melissa Fradenburg, Financial Advisor. We dive deep into topics like work-life balance, financial planning, personal growth and the intricacies of the sandwich generation.
Melissa Joy:Tune in for money conversations that every woman needs to have. Hello everyone, it's Melissa Joy, welcoming you back to the Women's Money Wisdom Podcast. I am joining you today to talk about one of the things that it may surprise you, but is the reason a lot of people reach out to us and start to work on their financial plan. That is when you have cash that piles up and you don't know what to do with it, which I know some of you are listening in and saying that is not the point in life I'm at, but I would encourage you to continue to listen in because I think there's a lot of good tips along the way about just regular management of your funds. We're definitely going to talk about emergency reserves and then also just a great way to audit the accounts that you do have available to you to make sure that they are the right ones. So, as we get started, I wanted to let you know kind of the roadmap of what we're going to discuss. We're going to talk about how to determine and revise your emergency reserves when you know the amount that you should have in there, how to make sure that they're being managed successfully and then, for those people that have the cash piling up, how to review your existing accounts to see kind of an audit of where there's opportunities to put a little more in, as well as if you are all full of those existing resources where to consider adding next. So without further ado, let's get started.
Melissa Joy:I want to talk to you first about determining the right amount that you need for your emergency reserves, and you know everybody has a rule of thumb and it may or may not apply to you. I know that many people say if you're in a double income family, perhaps three to six months of expenses is appropriate, or if you're on a single income, six to 12 months. And some people are really diligent about going through and saying all of their expenses and exactly how much that amount would be. So I think it's great For other people, though, that amount might be not enough for them to feel comfortable, whether it is because you have more expensive potential emergencies so let's say that you have more expensive property and so if anything needs to be repaired or fixed, then it's going to cost more. Or maybe you need to replace a vehicle sometime in the next six to 12 months or the next time there's a major repair. It's going to be the big time, or perhaps you're just someone who feels less comfortable when you don't have as much cash on hand. That's all valid and it sometimes gets missed in the conversations about rules of thumb.
Melissa Joy:On the flip side, some people may have built up a variety of financial asset accounts that kind of act as a backstop in addition to your emergency reserve. Later in this episode we're going to talk about brokerage accounts accounts that are taxable, not retirement accounts and those can often be a backstop, especially if you've built up more than just a little bit. Or perhaps you have stock options that many of our clients happen to work in technology companies and those options may be sitting in cash or not in cash, but in an account where you have the company stock, but it's easily accessible, especially if you don't have trading windows that you need to trade around. Another very typical example is a health savings account where you may have built up the account. You may not be using it for all of your medical expenses or your medical expenses may be lower. That can also be an additional emergency reserve, but life changes over time. So I really encourage you to at least once a year evaluate what is the right amount of cash to have on hand and you don't need to go to that exact amount. I think it's really helpful to have a dollar amount, so let's say it's $10,000 or $20,000 or maybe $50,000 or $100,000.
Melissa Joy:I work with people across the spectrum. All of those are appropriate. Some people even have even more and that's really right for them. But then you should also have a range, because you're not always going to have to trade to the exact penny. So maybe you know it's good if you have $50,000, but as long as it's above $30,000, that feels okay, and once it gets over $65,000 or $70,000, you know you need to pull things back down. I love the idea of these ranges because then you don't have to kind of go into action mode and you can either build things back up or incrementally take things down. I think it works really well.
Melissa Joy:So both have your emergency reserve and if you want to get kind of next level gold star, thinking about also having a range where you're comfortable, and then if your cash is over that range, then you don't have to take it all down at once, because I think sometimes people get intimidated by, you know, writing a big check into an account or something like that. But do think through the strategies that would make sense and we're going to talk about this in a moment that you could use to kind of deploy some of that cash for middle and longer term goals. Perhaps when you have that emergency reserve figured out, you've made sure that it fits your life right now, not your life three years ago or five years from now. Then I would encourage you to make sure that those funds are being responsibly invested, because nowadays you can get yield on cash, which we didn't have for quite a while, and so the yield can be quite sizable. I often say for money market accounts nowadays, recording in early 2024, that if you can get more than 4% yield, then it's kind of worth it.
Melissa Joy:I'm not saying that your checking account has to yield 4% or 5%, but definitely those reserve funds not the week to week funds are worth it, especially as you have higher amounts getting into the tens or hundreds of thousands of dollars that you should be receiving interest payments. In essence, behind the scenes, banks are making money on that cash. If you're not kind of getting that interest yourself, so make sure you're managing it, and we have several episodes and details that we'll provide and show notes that you can reference to make sure that you are responsibly investing in more cash like, or short term vehicles, the money that you have in emergency reserves, but then let's say that your range, your cash, is kind of skewing higher in that range as well. Well, the next thing I would encourage you to do is make a list of all of the accounts that fit in your household. So this may be both your, if you're listening in and you're in a relationship, and perhaps you're married, so you have multiple accounts on his and her sides, or hers and her sides. Do look through all of the accounts that you have available, especially if you plan as a family, because if you're married, most of those assets are likely marital assets anyway, unless we're talking about a unique kind of inheritance situation or something like that, and so I would look through and make a list of all of the accounts that are available to be contributed to that you'll already have, and so this would include perhaps one or two retirement accounts, or even more, depending on where you work, as well as health savings accounts, flexible spending accounts and IRAs and Roth IRAs. So go through, make that list and determine if there are any of those accounts that you may be able to bump up your contributions. So one easy kind of answer is perhaps you're putting in 10% to your 401k. You know you kind of topped out and got in ahead of the match that you might receive from your employer and so you're like, well, that's kind of done. But it may be the case where putting in more would have a tax advantage. Especially if you're aiming to retire a little bit earlier. That tax advantage might be significant relative to the tax rate that you would take money out. And so I always like to start and think about okay, which accounts could we put more money in? I'll give you an example.
Melissa Joy:I have a self-employed attorney that I'm working with Newly and last year she had made a lot of money, had a really great year in her business. It's kind of variable, so she always, you know, kind of pays the bills, but in some years there's really significant income, and so there was a lot of money in cash in which she was really trying to make sure that she was able to reduce taxes in that particular year, which there's a deadline you often need to do most of the things before 1231. And when we sat down and looked through everything, she was maxing out her existing retirement plan. There wasn't an option, at least for that calendar year, to change that retirement plan. And yet her spouse who she'd been married to for more than 20 years and it was marital assets, all of it Her spouse had not maxed out his retirement plan, and so that would have been a really straightforward way to get an immediate impact of the main goal, which was to reduce taxes, was to think about the money as family money, and of course there are considerations. I'm not saying that everybody is the same, but in this case you know why don't we put some money, more money, into the other retirement plan, and that would have the immediate tax advantage as well as a shared retirement advantage, because they're sharing in kind of their goals for retirement. So that's definitely something you know. Just looking through existing accounts, you may be missing things, because you know you just decided I'm only going up to the match, or you know I just am doing the HSA for the amount that my employer gives me and there's more to give, and those can be really big advantages. And that's a great example where you may not put all the money into the account all at once, but increasing that saving rate or the investing rate, can allow you to kind of drift down into the right range for your emergency reserves, and you can also test it and make that change for in many of these cases for several months and see if you feel like your cash flow is really dampened or hampered or if it feels sustainable.
Melissa Joy:But then I want to wrap up this episode by talking about taxable investment accounts. Brokerage accounts is often how people refer to them, so accounts that are not retirement accounts. I often find that people feel that these accounts are more difficult to understand. You know, you might have your little kind of trading or gambling account that you put your favorite stock ideas in, but doing kind of a systematic investment approach with taxable funds can feel like a challenge, and I get that because there is so much time spent. Perhaps there's more needed, but there's a lot of time spent educating people about their retirement plans. Oftentimes it's mandated, and so there's an education session when you sign up and then you have a once a year kind of get together.
Melissa Joy:There's a lot of discussion, for example, on IRA and Roth IRAs, but when it comes to taxable investment accounts, you're just not sure how you need to do it. You need to title that account. So decide whether it's in your individual name, a joint name or the name of a revocable living trust. In some cases there are tax consequences to the way that you invest. But this still might be the right approach and I think it's a really great approach If you are someone who is prone to saving more. I also think it's a fantastic approach If you are somebody who wants to retire before kind of standard retirement age of 65 to 70. So in those cases it just really helps to have different buckets of money in different places. It's especially effective for people retiring before age 59 and a half and it also just demonstrates your ability to save. It shows that you're not spending every dollar that's not placed into a retirement account. So that's exactly who the people we're speaking to in this episode are. It's people who really have a propensity to save and save successfully.
Melissa Joy:So when you do start these accounts, you may decide that there's just a level of complexity that requires you to work with, or both either requires you would prefer to work with a financial professional. This is often, like I said, the point in time where we kind of come in with a role when working with families. But also, you may decide that you want to do this yourself and you can definitely pick up a brokerage account, thank you, and enroll in it yourself and start adding to those funds. I would just encourage you to understand the taxes I would encourage you to think about. They will often ask you what is your cost basis election method gonna be, and that can make a difference in how you pay taxes. A lot of times nowadays there's something called either highest cost or minimum tax that can help you to be a little more tax efficient and then some types of investments especially if you don't trade them all the time can just be a little bit more tax aware as well. We have some resources. We've done episodes on tax aware investing, also webinars, so I'll make sure to include those in show notes.
Melissa Joy:But I hope that you get the message in this episode that you're not necessarily done, that there are some great opportunities in terms of the way to invest. There might be a little additional degree of difficulty when it comes to those accounts that are just used after you've maxed out your traditional 403B or 401K. But don't give up. Do kind of evaluate over time the next best pathway and also decide should I be putting in some money every month. Would it make me feel more comfortable that way, cause it's just kind of a little over time? I was recently talking to someone who said no, I really like it when one of us gets a bonus or I get a big payment from my business. I would rather do that type of investment in chunks. I say whatever is right for you.
Melissa Joy:Not every family is the same, and that's one of the reasons this part feels more difficult, because it's just everybody's a little more, a little different, and this type of investment management requires a little more customization and personalization in many cases, and so that's where the role of a financial professional may come in a certified financial planner or investment advisor. They may be able to help you really navigate the goals and to figure out how much and when and what should go into these types of accounts. I hope you enjoyed this conversation. We are always looking for topics based on what our clients are telling us, but if we're missing topics and you have an idea of what you would like us to cover, please do let us know.
Melissa Joy:And just last note, we did a webinar this month that went over some great investment strategies, tips and tricks and things you may be missing. We're actually covering this topic of what happens when cash piles up. Make sure to check it out in your show notes. We will be linking to that webinar so you can see a recorded video. If these types of topics are up your alley. And with that, have a great week and we'll see you next week. Thank you for listening to the Women's Money Wisdom podcast.
Melissa Fradenburg:If you found value in our conversations, please take a moment to like, follow and subscribe wherever you're tuning in from. It helps us continue to bring these valuable insights week head over to Women's Money Wisdom podcast. If you found value in our conversations, please take a moment to like, follow and subscribe wherever you're tuning in from. Head over to womensmoneywisdom. com, there you'll find tools, tips and a supportive community to help you gain financial confidence.